What is cash flow and why is it important?
What is cash flow?
The cash flow, as you can see from its name, means the money that enters or exits your company’s vault in a monthly period. In particular, in economic terms, some employers were pessimistic and said, “cash flow is only the money that comes out of my vault!” they can say. However, the essence of this concept is as stated in our definition, that is, it covers both the money that the company spends and the money that it earns. The two-way flow of cash can be explained as follows::
1 – positive cash flow: you get cash when customers buy your products or services. If your customers do not pay for the products they receive immediately, you will become a creditor. In such a case, your cash flow is provided by the customers to pay their debts on time.
2 – negatives cash flow: with the payment of expenses such as rent, credit, taxes, and this is a part of your cash flow.
You can see the cash flow as your company’s demand deposit account. If you can deposit money to a demand account at any time, your cash flow can also increase with payments from your customers at any time. Similarly, your cash flow can be reduced suddenly due to your debts and expenses as the demand account can be reduced at any time. If you make more money than you spend, your cash inflow is more than your cash outflow. In this case, we can say that you have a positive cash flow and enough money to pay your bills. Now, let’s just think the opposite: if you have to spend more than the amount you earn, you’re drifting into the swamp. In such a case, we can say that you have a negative cash flow. As tradesmen say, you have to constantly “come in” and find resources for your expenses. This is why newly established companies need revolving funds, which are provided by methods such as borrowing from loans or co-workers. Once the money is found, the costs are paid in a way.
What is the difference between cash and real cash?
Cash in some business branches is really very important. For example, consider restaurants or retail stores. Businesses like this need to earn “paper money” you know, otherwise they don’t even have to be dragged into the swamp. If you have a business like that, you need to pay your bills in cash most of the time, so you try to get cash from your customers (that’s exactly what we mean by real cash). Let us also note that cash-based businesses often have difficulty following the cash flow. If you are a business owner working in cash and you are not registering both your income and expenses with invoices, it is hard to know exactly what enters and exits your cash register.
Why is cash flow so important?
One of the main reasons for the bankruptcy of small businesses is the lack of cash. When we examine a lot of recent research, we see that the cash reserves of the startups are generally inadequate and that a large portion of them have been dragged into the swamp in a short period of time. This is exactly what the public calls “seeing the bottom of the pouch” or “pulling the water out of the money”. If you haven’t set up your own company yet, let’s just give a small warning: there are a lot of things that can wreck a company. But none of this affects money as quickly as it does, so if a company fails, the quickest way is to run out of cash reserves.
Importance of cash flow when starting a business
Providing cash flow from scratch is perhaps the most difficult thing you have to deal with during your career. Think about it, your business has only been a few months, you have to buy and invest something constantly, so you’re wasting your time on one. In fact, during this time you do not have more customers, so the amount of income is almost crawling on the ground. In such a case, you must find a loan from somewhere, and then you should go straight out to reverse the bad course, eventually closing your debts with the revenues you will get from your new customers.
Cash flow in seasonal jobs
In seasonal jobs such as restaurant management in holiday villages or touristic places, cash flow is of vital importance. It is quite difficult to manage the cash flow correctly in such jobs, but certainly not impossible. If you are only making money in certain periods of the year, be sure to take into account your spending in the remaining months and be affordable.
What is the difference between cash flow and profit?
Sometimes your company makes a profit, but there’s no cash! So how is this possible? The answer is simple: profit is an accounting concept. As mentioned above, the cash is composed of the amount of money in your demand account. Let’s say you made a very good sale, your profit level is fine, but you did not take the money in advance and you have a large amount of money to collect from your customers. In such a case, we cannot say that your cash flow has increased in a positive way because the money has not yet reached your hand.
In fact, many accounting systems today have the ability to clearly show the differences between the number of profits and cash generated by companies. If you have adopted the concept of accrual accounting in your company, you know how much you will earn even if you have not yet been able to pay when you issue an invoice. In such a situation, I made an amount of “X ” profit. you can say, ” but you can’t get a direct cash.
How can you analyze your cash flow?
The best way to track your company’s cash flow is to prepare a cash flow report on a regular basis. In this report, which we can refer to as a cash flow chart, you can see changes in the amount of cash in your demand account. This way, you can see how much income you make and what you spend.
You can also answer the following questions in a convenient way if you move regularly and check your cash flow reports continuously.:
How does a change occur in cash flow if one of the customers pays his debts?
How will your cash amount be affected if you supply new products?
Would you be financially difficult if you went and bought a computer?
How much cash do you have when you pay your wages or debts?
Remember that in order to answer these questions in real life, you should always keep your cash flow tables up to date and constantly review them. Keep an eye on your financial trajectory by checking monthly, or even daily, if possible.
“So what should I pay particular attention to when I follow my cash flow?” if you say, the following advice will do your job:
1. At the end of each month, look at your total sales amount.
2. Look at your total purchase amount. Be sure to reduce the price of the products you buy in terms of time and still do not pay your debt.
3. Last but not least, remove your total costs from the revenues you’ll get from the products you sell. You can accept the difference as your total income or earnings that month.
If you are in a negative state, that is, your expenses have left your income, and you can’t get to the plain, then you’re really drifting into the swamp.
But if you constantly check your accounting system or contact your accountant, you will not fall into such a situation.